Trump Administration Faces Difficult Task Navigating a Strong Dollar

Will the strong United States dollar dominate the economic policy of the Trump administration?

It seems that this might be the case. Consider an article by Andrew Tangel and Josh Zumbrun in The Wall Street Journal.

"A strengthening dollar is re-emerging as a threat to U.S. manufacturers by making their exports more expensive and their foreign earnings less valuable."

"The WSJ Dollar Index, which measures the U.S. currency against 16 others, hit a 14-year high last week."

To get some idea of how this dollar strength might impact the U. S. economy, The Journal asked Ben Herzon, a senior economist at Macroeconomic Advisers, to run some simulations to get a feel for how a stronger dollar could impact the economy.

"if the dollar doesn't strengthen further, inflation-adjusted GDP would cumulatively rise by 6.3% over the next three years."

"If it strengthens by 10%, that growth would be 4.5%...."

The pain of this increase "would be especially concentrated in U.S. factories. Manufacturing production would be 3.6 percentage points lower under a strong dollar, inflation-adjusted imports would be 3.6 percentage points higher, and real exports from the U.S. to the rest of the world would be 6.2 percentage points lower."

The hope is that the Trump administration's economic policies would counter this stronger dollar.

Hopes for Trump's policies focus on lower taxes, lighter regulatory burdens, and plans to overhaul infrastructure to increase economic growth and overcome the decline in exports.

The concern about Trump's policies is whether they are backward focused. That is, Trump's policies might be aimed at the way the world used to be. The policies might be built around old models and old policy prescriptions based on demand side economics. Consider the following: 

  • The economic growth of the United States, although weak, is higher than it is in many other countries and, as a consequence, many of these other countries are following economic policies that weaken their currencies. This situation will continue throughout the next four years, at least. This policy environment has not been a common consideration in previous policy discussions.

  • Changes in infrastructure spending will take time and not change the economic outlook immediately. In fact, most polices that aim at increasing productivity and improving the employment situation for many less-educated, less-trained workers will take time and not change the economic outlook immediately.
  • Keynesian-type policies aimed at increasing aggregate demand have lost effectiveness as the "financialization" of the United States economy has expanded. Money does not flow into the industrial circuit of the economy as in the past, but does flow into the financial circuit, manifesting itself as stock buybacks and dividend increases.
  • There is even a problem with the reduction in regulation. Take the banking industry. Many analysts are hoping for a roll-back in the Dodd-Frank legislation to take the burden of these regulations off banks. But the banks have adjusted to Dodd-Frank, especially the biggest banks, and the move back would result in the industry having to re-adjust again, causing delays and further costs.
  • As the economy continues to grow, inflation is expected to increase and with this rise, interest rates are expected to rise, which will mean that the Federal Reserve will be further increasing its policy rate of interest. This will further underwrite the strong dollar.
  • Finally, there are reasons that the United States should want to maintain a strong dollar. The reality of a strong dollar is going become a major consideration in whatever the Trump administration plans to do. Therefore, it needs to build the maintenance of a strong dollar into its economic policies. Building such an objective into the Trump economic polices is consistent with another force spreading throughout the world, the force of technological change. This latter movement is emphasized by Thomas Friedman in his new book Thank You For Being Late. The idea here is that the technology platform that exists within an economy turns over every five to seven years, but the ability of humans to adapt to this change adjusts every 15 years or so. Thus, "we must rewire our societal tools and institutions so that they will enable us to keep pace. This rewiring includes the challenge of dealing with "the way we educate our population."
  • This will require major policy changes, lots of resources and a long implementation time. So it needs to start right now.

    But this is the only way that the United States can improve not only labor productivity but labor force participation over time. Labor force productivity and labor force participation must both increase to make United States exports as competitive as possible in world markets.

    The value of the United States dollar is going to be a more important variable in the economic policy decisions during the Trump administration than it has been since the Second World War.

    Let's hope that the Trump administration looks past near-term band-aids and addresses what is needed to achieve longer-term global success.

    This article is commentary by an independent contributor. 

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